Our multistate unitary group thinks Illinois's standard single-sales-factor throwback formula grossly overstates our Illinois income -- can we petition to use an equally weighted three-factor formula, or drop throwback sales, instead?

Plain-English summary

A unitary group with two Illinois-based manufacturing affiliates petitioned the Department to use an alternative apportionment method for three tax years, arguing Illinois's standard formula grossly distorted its true Illinois presence. The affiliates manufacture in Illinois but ship to customers nationwide, including states where the affiliates themselves aren't taxable; under the standard "throwback" rule, sales into those untaxed states get counted back into Illinois's sales-factor numerator. The taxpayer argued this attributed a wildly disproportionate share of its income to Illinois relative to Illinois's actual share of its market, backed by a third-party economic analysis comparing its operating margins to unrelated distributors.

The taxpayer proposed two alternatives: (1) an equally weighted three-factor formula (property, payroll, and sales, still with throwback), or (2) a single sales factor WITHOUT throwback -- asking the Department to approve at least one.

The legal standard. Illinois's default apportionment is a single sales factor (35 ILCS 5/304(a)). A taxpayer may petition under Section 304(f) to use an alternative method, but only where the standard method doesn't fairly represent the market for the taxpayer's goods or services -- and the taxpayer carries the burden of proving either that the standard method taxes "extraterritorial values" or arbitrarily attributes an out-of-proportion share of income to Illinois (citing Lakehead Pipe Line and the constitutional distortion principles from Hans' Rees' Sons v. North Carolina and Container Corp. v. Franchise Tax Board, which called the three-factor formula the historical "benchmark" for fair apportionment).

Why the petition failed. The Department found the taxpayer hadn't met that burden. Its petition, at bottom, only showed that its proposed alternative methods reached a DIFFERENT (lower) apportionment percentage than the standard formula -- and an alternative method "may not be invoked, either by the Department or by a taxpayer, merely because it reaches a different apportionment percentage than the required statutory formula." Showing a different number isn't the same as proving genuine distortion.

The throwback-removal proposal backfired on its own logic. The Department also pointed out that dropping throwback sales wouldn't even fix the problem the taxpayer identified -- to the extent throwback captures real Illinois-connected activity, removing it would create "nowhere income" untaxed by any state, which is contrary to the legislature's intent that 100% of business income be taxed somewhere. The fact that including throwback sales increases the Illinois numerator isn't, by itself, evidence of an unfair or distortive result; if the unitary group benefits from Illinois's markets and legal protections, the statutory formula (including throwback) is presumed to be a fair measure of that benefit.

The petition for all three tax years was denied.

What this means for you

Multistate unitary groups considering an alternative apportionment petition

A lower number under your proposed method is not, by itself, proof of distortion. You need to affirmatively show the standard formula taxes income with no real connection to Illinois, or arbitrarily attributes a share of income wildly out of proportion to your actual Illinois market -- a comparative economic analysis alone (like the operating-margin study here) wasn't enough without connecting it to that specific legal standard.

Groups affected by Illinois's throwback rule

Don't assume removing throwback sales helps your distortion argument -- if throwback is capturing genuine Illinois-connected sales activity, eliminating it can create untaxed "nowhere income," which the Department treats as cutting against your own position, not for it.

Accountants and tax professionals

This GIL is a clear illustration of the "different percentage isn't distortion" rule under 86 Ill. Adm. Code 100.3390(c) -- build any Section 304(f) petition around the extraterritorial-values or out-of-proportion-market standard from Lakehead Pipe Line, not simply a side-by-side comparison of formula outputs.

Common questions

Q: Can we get Illinois to approve an alternative apportionment method just by showing it produces a lower Illinois tax?
A: No -- the Department requires proof that the standard formula produces a genuinely distorted result (taxing extraterritorial values or an out-of-proportion share of income), not merely that an alternative method reaches a different number.

Q: Does removing "throwback" sales from our apportionment formula help show distortion?
A: Not necessarily, and it can undercut your case -- if throwback sales reflect real Illinois-connected business activity, removing them creates untaxed "nowhere income," which runs contrary to the legislative purpose of the throwback rule.

Q: What kind of evidence does Illinois expect for an alternative apportionment petition?
A: Evidence tied to the legal standard itself -- that the standard method taxes extraterritorial values or arbitrarily attributes an out-of-proportion percentage of income to Illinois relative to your actual market here, not just a comparison showing a different formula yields a smaller number.

Q: Is the three-factor (property, payroll, sales) formula still available in Illinois?
A: Illinois's default method for most taxpayers is a single sales factor; a taxpayer can only use a three-factor or other alternative method by successfully petitioning under IITA § 304(f) and meeting the distortion standard.

Citations and references

Statutes, regulations, and cases:

• 35 ILCS 5/304(a) (single sales-factor apportionment)
• 35 ILCS 5/304(a)(3)(B)(ii) (throwback rule)
• 35 ILCS 5/304(f) (alternative apportionment petition)
• 86 Ill. Adm. Code 100.3390 (petition procedure and burden of proof)
• 86 Ill. Adm. Code 100.3380(a)(2) (Director-prescribed alternative methods)
• Lakehead Pipe Line Co. v. Department of Revenue, 192 Ill. App. 3d 756 (1st Dist. 1989)
• Hans' Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931)
• Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2026.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2026/it26-0002-gil.pdf

Original ruling text

IT 26-0002-GIL
03/30/2026 ALTERNATIVE APPORTIONMENT
Petition to include property and payroll apportionment factors in sales factor
calculation cannot be granted merely because the alternative method reaches a
different apportionment percentage than the required statutory formula. (This is a
GIL.)
March 30, 2026
NAME
COMPANY1
ADDRESS
EMAIL
Re:

Petition for Alternative Apportionment
COMPANY2
FEIN: NUMBER
Tax Years Ended: YEAR1, YEAR2, YEAR3

Dear NAME:
This is in response to your November 13, 2025, petition on behalf of COMPANY2, to use an
alternative method of allocation or apportionment effective for tax years ending YEAR1,
YEAR2, and YEAR3. The Department issues two types of letter rulings. Private Letter Rulings
(“PLRs”) are issued by the Department in response to specific taxpayer inquiries concerning
the application of a tax statute or rule to a particular fact situation. A PLR is binding on the
Department, but only as to the taxpayer who is the subject of the request for ruling and only
to the extent the facts recited in the PLR are correct and complete. Persons seeking PLRs
must comply with the procedures for PLRs found in the Department’s regulations at 2 Ill.
Adm. Code 1200.110. The purpose of a General Information Letter (“GIL”) is to direct
taxpayers to Department regulations or other sources of information regarding the topic
about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
https://tax.illinois.gov/ to review regulations, letter rulings, and other types of information
relevant to your inquiry.
The nature of your request and the information you have provided require that we respond
with a GIL. For the reasons discussed below, your petition cannot be granted based on the
information provided.
Your petition for tax years ending YEAR1, YEAR2, and YEAR3 states as follows:
INQUIRY:

COMPANY2
Page 2
March 30, 2026
On behalf of our client, COMPANY2, we hereby petition for use of an
alternative method for apportioning COMPANY2’s unitary business income
for the tax years ending YEAR1; YEAR2; and YEAR3.
As this petition will explain, COMPANY2 has two unitary affiliates which
manufacture industrial products in Illinois and distribute them to customers
in other states, including states in which neither affiliate is itself subject to tax.
Under the statutory formula, gross receipts from sales to customers,
originating in Illinois, in the states where these affiliates are not taxable are
“thrown back” to Illinois and counted in the sales factor numerator of the
respective sellers.
As this petition will also explain, applying the statutory “throwback” rule to the
gross receipts from these sales yields a grossly distorted result in at least two,
related respects: First, by taxing unitary group profits that are in no sense
attributable to transaction in Illinois. And second, by attributing to Illinois a
percentage of COMPANY2’s combined income that is out of all proportion to
the market for the unitary group’s products in the state.
To remedy this distortion, COMPANY2 therefore petitions for use of either one
of the following alternative methods: (i) inclusion of equally weighted
property, payroll, and sales factors with throwback; or (ii) a single sales factor
without throwback. (See Exhibit 1).
BACKGROUND FACTS
COMPANY2’s Manufacturing and Distribution Business
COMPANY2 and its unitary affiliates manufacture and distribute a wide
variety of industrial products to diverse customers in the aerospace and
defense, oil and gas, medical imaging, and pharmaceutical sectors, among
others. During the years at issue, COMPANY2 and its unitary affiliates
distributed these products to customers nationwide, including to customers
in Illinois.
Two unitary affiliates have manufacturing operations in Illinois: COMPANY3,
which makes products for use by defense contractors, and COMPANY4,
which makes electronic test and measurement equipment for customers in
different industries. During the years at issue, both companies shipped
products from facilities in Illinois to customers in states where neither seller
was subject to tax.

COMPANY2
Page 3
March 30, 2026
COMPANY2’s Apportionment Factor
Illinois’s standard apportionment factor including throwback sales and no
property and payroll factor is PERCENT; PERCENT; and PERCENT,
respectively for tax years ending YEAR1; YEAR2; and YEAR3. (See Exhibits 1,
3-5).

PETITION FOR ALTERNATIVE APPORTIONMENT
Section 304(f) of the Illinois Income Tax Act allows taxpayers to petition for
use of an alternative apportionment method under certain circumstances.
35 ILCS 5/304(f). Specifically, the statute provides that for taxable years
ending on or after December 31, 2008, a person may request permission to
use an alternative method when the standard method does not fairly
represent the market in Illinois for the person’s goods or other sources of
income. Id.
A person requesting an alternative apportionment has the burden of proof.
To satisfy this burden, the person making the request must show that the
regular method results in taxation of extraterritorial values, or that it
arbitrarily attributes to Illinois a percentage of income that is out of all
proportion to the market for the person’s goods in the state. Lakehead Pipe
Line Co., Inc. v. Dep’t of Revenue, 192 Ill.App.3d 756, 762-63 (1st Dist. 1989);
86 Ill. Admin. Code § 100.3390(c).
This standard derives from the U.S. Supreme Court’s opinion in Hans’ Rees
Sons Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931). In that case,
the Court considered whether as applied, North Carolina’s single-factor
property formula was unconstitutional when the formula apportioned 80% of
the taxpayer’s unitary income to North Carolina, when on average, only 17%
of that income was from operations actually conducted in the state (or 4.7%
of actual value).
The taxpayer was a New York corporation engaged in tanning and
manufacturing leather in North Carolina. The facts showed that 17% of the
taxpayer’s income was attributable to its tanning and manufacturing in North
Carolina, with the rest attributable to its buying and selling activities
conducted elsewhere. Under North Carolina’s single-factor property
formula, approximately 80% of the taxpayer’s income was apportioned to
the state.

COMPANY2
Page 4
March 30, 2026
The Court explained that a state may not apply a formula, even though fair on
its face, when the formula apportions to the state “profits which are in no
just sense attributable to transactions within its jurisdiction.” Id. at 134. The
Court further explained that it need not determine “the precise part” of the
unitary income which should be attributable to the local tanning and
manufacturing, since the formula arbitrarily attributed to North Carolina a
percentage of the taxpayer’s income “out of all appropriate proportion” to
the business transacted in the state. Id. at 135.
The Statutory Formula Yields a Grossly Distorted Result
As applied to COMPANY2, the single-factor sales formula under Section
304(a) produces the same sort of result, only worse: it apportions on average
some PERCENT of its unitary profits to Illinois, when only PERCENTPERCENT (depending on the year) of those profits were from sales activities
actually conducted in the state (or PERCENT-PERCENT of actual value). This
highly distortive result is borne out by a third-party economic analysis of the
operating margins of COMPANY3 and COMPANY4’s distribution activities1.
This analysis examined the operating margins of eleven unrelated
distributors, chosen for their functional similarities to the distribution (sales)
activities of COMPANY3 and COMPANY4. The analysis shows that the threeyear average operating margin for the unrelated distributors was PERCENT,
while COMPANY3 and COMPANY4’s operating margins for the same period
were much higher – PERCENT and PERCENT respectively.
This economic analysis demonstrates what is fairly attributable to a
distributor, a sales only type functioning business, which in this case would
be PERCENT revenues. As such, the distortive difference between the
comparables’ operating margins and COMPANY3/COMPANY4 is attributable
to other than distribution (sales) activities such as capital and labor
employed (property and payroll factors).
COMPANY2’s business includes not just distribution (sales) activities but
also manufacturing activities. COMPANY2’s operating margin of the unitary
group is therefore dependent on additional factors besides sales, such as
property and payroll components. See Exhibit 2.
The Proposed Methods Fairly and Accurately Apportion Income to Illinois
1

The analysis focused on margins from distribution because the sales factor measures results from distribution
activities (See Exhibit 2).

COMPANY2
Page 5
March 30, 2026
The first method – equally weighted payroll, property, and sales factors (with
sales throwback) – fairly and accurately apportions income to Illinois based
on COMPANY2’s sources of business income in the state. The data shows
that PERCENT of COMPANY2’s unitary income is attributable to sales
activities, meaning that the substantial majority of its apportionable income
is from other, non-sales sources – namely, the manufacturing and related
activities performed by the COMPANY2 workforce.
COMPANY2 should be allowed to apportion its business income using an
equally weighted, payroll, property, and sales (with throwback) formula
because such a formula more accurately reflects how COMPANY2’s
apportionable income is actually generated, that is, through the combination
of its payroll, property, and sales. (See Exhibit 4). Indeed, this is precisely
why the three-factor formula has received the constitutional seal of approval
from the United States Supreme Court.
In Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983), the
Court remarked that the three-factor, payroll, property, and sales formula is
the “benchmark” against which other apportionment formulas is the
“benchmark” against which other apportionment formulas are judged. Id. at

170. This is so, the Court explained, because in combination, these factors
     reflect a reasonable sense of how income is commonly generated. Id at 180181. “The factor or factors used in the apportionment formula must actually
     reflect a reasonable sense of how income is generated.” Id. At 169. And
     presumably for this reason, this very method was for more than three
     decades the standard in Illinois.
     The first proposed method fairly and accurately apportions credit for
     COMPANY2’s unitary income based on the factors most directly responsible
     for the income’s production – that is, its labor, its capital, and its sales.
     COMPANY2 should be allowed to use the method accordingly.
     In addition, the other method – single sales factor, without throwback –
     would produce an equally fair and accurate apportionment, based on the
     actual market for COMPANY2’s goods in Illinois. Indeed, the original
     justification for the sales factor was that the factor reflects the contributions
     to the production of income made by the market state. See W. Pierce, The
     Uniform Division of Income for Tax Purposes Act (1957), 35 Taxes 747.
     Although the throwback rule may help achieve one policy objective, i.e.,
     ensuring that 100% of income is taxed, it sacrifices another, i.e., taxing only

COMPANY2
Page 6
March 30, 2026
income earned in Illinois, through the fiction that Illinois is the market for
goods in fact delivered to purchasers in other states. Illinois accounts for
PERCENT-PERCENT and PERCENT-PERCENT (depending on the year),
respectively, of the total market for COMPANY3 and COMPANY4’s products.
The second proposed method fairly, and much more accurately apportions
COMPANY2’s unitary income to Illinois based on the state’s share of the
actual market for its goods. If the Department does not approve the first
method, COMPANY2 should be allowed to use this method instead (See
Exhibit 5).
This petition along with copies of the exhibits, including amended returns,
are being filed with both the Legal Services Bureau/Income Tax and amended
return mailing addresses.
We look forward to the Department’s response. We also respectfully request
a meeting with the Department to discuss this request. If you have any
questions or comments regarding this petition, feel free to call me at
PHONE, or send me an email at EMAIL. (A power of attorney authorizing me
to submit this petition is enclosed.)
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304) provides that when a
nonresident derives business income from Illinois and one or more other states, such
income shall be apportioned to Illinois by multiplying the income by the taxpayer’s
apportionment factor. For taxable years ending on and after December 31, 1998, except in
the case of an insurance company, financial organization, transportation company, or
federally regulated exchange, the apportionment factor is equal to the sales factor. IITA
Section 304(a)(3) defines the sales factor as a fraction, the numerator of which is the total
sales of the person in Illinois during the taxable year, and the denominator of which is the
total sales of the person everywhere during the taxable year.
Section 304(f) of the IITA provides:
If the allocation and apportionment provisions of subsections (a) through (e)
and of subsection (h) do not, for taxable years ending before December 31,
2008, fairly represent the extent of a person’s business activity in this State,
or, for taxable years ending on or after December 31, 2008, fairly represent
the market for the person’s goods, services, or other sources of business
income, the person may petition for, or the Director may, without a petition,

COMPANY2
Page 7
March 30, 2026
permit or require, in respect of all or any part of the person’s business
activity, if reasonable:
(1) Separate accounting;
(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors which will fairly
represent the person’s business activities or market in this State; or
(4) The employment of any other method to effectuate an equitable
allocation and apportionment of the person’s business income.
Taxpayers who wish to use an alternative method of apportionment under IITA Section
304(f) are required to file a petition complying with the requirements of 86 Ill. Adm. Code
Section 100.3390.
86 Ill. Adm. Code Section 100.3380(a)(2) provides:
The Director has determined that, in the instances described in this Section,
the apportionment provisions provided in IITA Section 304(a) through (e) and
(h) do not fairly represent the extent of a person’s business activity or market
within Illinois. For tax years beginning on or after the effective date of a
rulemaking amending this Section to prescribe a specific method of
apportioning business income, all nonresident taxpayers shall apportion
their business income employing that method in order to properly apportion
their business income to Illinois. Taxpayers whose business activity or
market within Illinois is not fairly represented by a method prescribed in this
Section and who want to use another method for a tax year beginning after
the effective date of the rulemaking adopting that method may obtain
permission to use that other method by filing a petition under Section
100.3390. For tax years beginning prior to the effective date of the
rulemaking adopting a method of apportioning business income, the
Department will not require a taxpayer to adopt that method; provided,
however, if any taxpayer has used that method for any of those tax years, the
taxpayer must continue to use that method for that tax year. Moreover, a
taxpayer may file a petition under Section 100.3390 to use a method of
apportionment prescribed in this Section for any open tax year beginning
prior to the effective date of the rulemaking adopting that method, and that
petition shall be granted in the absence of facts showing that that method
will not fairly represent the extent of a person’s business activity or market in
Illinois.
Your petition indicates that the single-sales factor apportionment formula as applied to
COMPANY2 does not fairly reflect the market activities as a result of their Illinois

COMPANY2
Page 8
March 30, 2026
operations. You indicate that property and payroll apportionment factors must be included
as these are material requirements in producing those sales. In addition, you indicate it is
reasonable to request those factors to be considered in the determination of the share of
income attributable to Illinois as failing to do so would result in a significant gross
distortion of COMPANY2’s true economic activity and market within Illinois. Alternatively,
your petition proposes the removal of throwback sales from the standard apportionment
formula would result in a more equitable apportionment as the inclusion of these sales
results in gross distortion of COMPANY2’s true market within Illinois.
The facts stated in your petition are not sufficient to satisfy the burden set forth in Ill. Adm.
Code Section 100.3390(c). As indicated above, for taxable years ending on or after
December 31, 2008, alternative apportionment under IITA Section 304(f) is appropriate in
cases where the allocation and apportionment provisions under IITA Sections 304(a)
through (e) and of subsection (h) do not fairly represent the market for the taxpayer’s
goods, services, or other sources of business income. In this case, your petition does not
meet the regulatory requirement and cannot be granted at this time. Your petition merely
states that due to the statutory exclusion of the property and payroll apportionment
factors, an evenly weighted three-factor formula consisting of property, payroll, and sales
reaches a different apportionment percentage than the required statutory formula. The
petition indicates that using an evenly weighted three-factor formula is expected to result
in a smaller Illinois apportionment factor. An alternative apportionment method may not
be invoked, either by the Department or by a taxpayer, merely because it reaches a
different apportionment percentage than the required statutory formula.
In addition, the alternative proposal to exclude throwback sales does not address the first
problem you identify, which is the statutory apportionment formula’s failure to reflect the
taxpayer’s activities in Illinois. To the contrary, to the extent the throwback rule reflects the
taxpayer’s activities in Illinois, excluding throwback sales will exacerbate this problem. The
intent of the throwback rule under IITA Section 304(a)(3)(B)(ii) is to ensure that 100% of a
taxpayer’s business income is apportioned to states that have the jurisdiction to do so.
Excluding these sales would result in “nowhere income” that is not taxed by any
jurisdiction, which is contrary to the legislative intent of the IITA. Therefore, the statutory
formula correctly captures the taxpayer’s business activity sourced from Illinois. The fact
that the inclusion of throwback sales increases the Illinois sales factor numerator does
not, in itself, constitute evidence of a grossly distortive or unfair representation of the
taxpayer’s market in this State. If the unitary group benefits from Illinois’ markets and legal
protections, the statutory formula - including throwback - is the presumed fair measure of
that benefit.
Your petition is, therefore, nothing more than a showing that both proposed methods of
alternative apportionment reach a different result than the statutory one. Accordingly, your

COMPANY2
Page 9
March 30, 2026
petition for alternative apportionment for tax years ended YEAR1, YEAR2, and YEAR3
cannot be granted.
As stated above, this is a General Information Letter. A General Information Letter does not
constitute a statement of policy that applies, interprets or prescribes the tax laws, and it is
not binding on the Department.
Sincerely,

Jennifer Uhles
Associate Counsel
JU:se

Printed by the authority of the state of Illinois.
Electronic Only - One Copy
Issued 03/30/2026; Redacted 04/09/2026